Use the rally to reshuffle your portfolio

As India's growth-related issues remain unresolved, experts say investors should use the current rally to seek quality stocks

The surprising move by the US Fed of maintaining status quo over its $85 billion monthly bond purchase saw risk appetite increasing sharply on Thursday, amid hopes that easy money will continue, especially into riskier assets like emerging economies, including India, which has borne the brunt of selling pressure.

In fact, the Fed also pointed out that the downside risk to US growth and unemployment remains, which suggests any tapering of the bond programme might not start in the next three-four months. The move eases pressure on the rupee, at least for now. But experts are advising caution, even as some of them believe the current rally might have some legs still. They believe the rally can be used by investors to book profits or buy  quality stocks with better visibility.

What should investors do?
Though the issue of liquidity and currency shocks has been postponed for now, the bigger worry remains on the Indian economy. "I think investors should use this rally in the market to lighten their holdings and sit on some cash. Investors will get better opportunities over the next five-six months. The fundamentals are still weak," says Mehraboon Irani, principal and head, private client group business, Nirmal Bang Securities.

“This is a relief rally after the Fed announcement which can take the Nifty to 6,200 in the near term,” says Dhananjay Sinha, co-head, Emkay Global Financial Services.

Investors will need to watch the RBI’s actions on Friday as well as in the coming months. There is a high probability that the RBI may not cut rates early, but even if it announces a selective rate cut for certain sections of the market (like home or auto loans) or lowers the rates for the marginal standing facility (as is widely expected) on Friday, it should rub off positively on the market sentiment.

Where to invest?
Since there are many unknowns as far as the Indian economy and the global situation is concerned, the risk has not yet gone out of the markets, which is why experts advise not to turn ‘risk on’ and avoid stocks that are considered risky namely, those with low growth/earnings visibility, high debt, etc.

"There are issues about the fiscal deficit and the expected further deceleration in economic growth. If you look at the recent corporate tax numbers, we are going to see one of the worst quarters in terms of corporate financial performance in Q2. Industrial activity continues to slide. Inflation pressure on account of imported goods and price rise in domestic primary articles is endangering the early reversal of interest rates in the country,” says G Chokkalingam, managing director & chief investment officer, Centrum Wealth Management.

Those willing to take risks and capitalise on the short-term rally should pick good mid-cap stocks. Experts believe there is a trade-off between large-cap and mid- and small-cap companies. For instance, the Sensex is trading near its all-time high of 21,207 whereas the BSE Midcap index is 45 per cent lower compared to its all-time high. BSE Mid cap is currently trading at 6.87 times its earnings, 0.63 times its book value and offering a dividend yield of almost 1.84 per cent.

While banking stocks are seen as a good pick, it's still not the time to look at infra and capital goods stocks. From a medium to short term perspective, the IT and pharma space will continue to do well, even if the rupee gains. Companies like TCS, HCL Tech, Cipla,

Dr Reddy’s, Lupin and Sun Pharma are preferred choices of analysts. The recent correction provides an opportunity to buy some of them cheap.